Health savings accounts: An overview, plus some pros and cons

Lately, my dad’s been praising the benefits of having a health savings account. This year, he had the opportunity to get the most of his HSA — bad news for his health, but good news for his wallet (side note: Dad is now doing OK health-wise).

At any rate, I’ve spent the week researching, calculating and mulling over whether an HSA is the best option for me. I reviewed a lot of your comments from a previous piece. After a few conversations with Dad, I decided to put together a pro and con list to help me both understand HSAs and decide if I should open one.

Rather than save my notes in the annals of my laptop, I’ve decided to share them here, with the GRS readers who might find them useful. I’m not an expert, and I realize the topic was mentioned in a recent piece, HDHP with HSA: friend or foe? But perhaps you can consider this an overall, “for-Dummies” type of HSA guide. Also, I’m a freelancer, so my notes don’t take employer contributions into consideration.

HSA basics

If you already know the ins and outs of health savings accounts, you may want to skip this part. However, it could be a good refresher.

An HSA lets you save money for future health-related expenses. It’s essentially like an IRA savings account for your health. And after you turn 65, it’s even more similar to an IRA, because you can take out money for non-health expenses.

You can use money from your HSA to pay for a slew of health expenses, from contact lenses to acupuncture.

The money you put in the HSA is tax-deductible. Also, the money you withdraw isn’t federally taxed, as long as you spend it on approved, health-related stuff. The HSA’s interest income isn’t federally taxed, either.

There are limits to how much you can save. For 2012, you can sock away $3,100 if you’re an individual. If you’re in the 25 percent tax bracket, that would give you a maximum annual savings of $775 (for 2013, the limits are $3,250 for singles and $6,450 for families).

The pros of opening an HSA — there are many!

Tax incentives

For me, the main draw of the HSA is the tax savings. As I mentioned above, an individual can save up to $775/year (in the 25 percent bracket). That amount increases if you’re a family or if you’re over 55.

An HSA also earns interest, and unlike regular savings accounts, that interest isn’t taxed. I think the amount of interest I earned last month was something like six bucks. So my initial reaction is whoop de do, but my frugal side reminds me that every little bit helps.

Responsible planning

The most obvious benefit of the HSA is that you’re funding the future. You’re being responsible. The HSA is an emergency fund for your health.

And if you really hit tough times, you can even withdraw the HSA money to pay for non-health expenses. Of course, you’ll be taxed on that — plus, you’ll pay a penalty.

After age 65, you can use your HSA savings as retirement money. You’re free to spend it, penalty free, on non-health expenses.

Free preventive procedures

Wellness procedures — breast exams, cancer screenings — are usually not subject to the HSA-compatible plan’s deductible. Those office visits are covered before the deductible, and often, they’re free. Of course, many traditional insurance plans have that same benefit.

HSAs can pay for a variety of expenses

You might be surprised at some of the things you can buy with your HSA money.

Band-aids? Covered. Condoms? Yep. You can even pay for rubbing alcohol with your HSA. Examples that are probably more helpful include chiropractic adjustments and mental health services.

The cons of opening an HSA — there are a few

Cost of office visits and prescriptions

I compared my traditional Blue Shield plan with their HSA-compatible plan. With the HSA, I’d be responsible for paying the full amount of doctors’ visits and prescriptions — until I met the deductible. But the deductible is $6,000 — I’m probably not going to reach that. If I have a couple of non-preventive office visits and prescription expenses a year, the HSA plan would end up costing me several hundred bucks.

Compared to my traditional plan, which requires that I pay $35/visit and $10/prescription (before the deductible), I could actually be spending more for the HSA plan — even considering the tax savings. I suppose it depends on what health issues arise and how much I’m willing to contribute.

Fees

Unsurprisingly, like any other bank account, an HSA comes with its share of fees. They vary, but from my research, most seem to have a start-up fee, transaction fee, debit fee, and in some cases, a monthly maintenance fee. Some may even have a minimum account balance fee.

State tax

Even though the federal government allows deductions of HSA contributions, a few states don’t follow suit. Alabama, California and New Jersey don’t allow income deductions for the money you save in your HSA. And in New Hampshire and Tennessee, you’re still taxed on the earned interest.

Not meeting the deductible

This is pretty much what Joanna discussed. In theory (and, according to some of your comments, in reality), the health expenses you may have to pay with an HSA plan could outweigh the tax savings. For example, one reader mentioned that the amount he pays in his prescriptions for the year makes the HSA not worth it. If the deductible isn’t being met, I can understand that.

This seems to be one of those “it depends on the situation” scenarios.

Short-term goals

While you can save up to $775 a year with the HSA, thisalso means you’re less $3,000 for the year. And that money might be crucial to your short-term goals. If you’ve got a car to save up for or debts to pay down, for example, contributing that much into an HSA may not be sensible.

There are plenty of reasons to love HSAs, and while I do think they’re great, I can also see scenarios in which the tax incentives might not always be worth it.

But of course, it’s not just about tax incentives — the point of the HSA is also to save for the future. In the end, that seems to be what it comes down to, whether you’re using an emergency fund or an account with tax incentives. In my dad’s simple but shrewd words: “The bottom line is: save, save, save — as much as possible. Trust me, you will need it.”

If you’ve passed on an HSA, why wasn’t it worth it to you?

What are some HSA pros and cons I’ve missed?

Is the HSA any more or less beneficial for families than for individuals?

Note: This article was edited to remove some erroneous information about tax savings. Remember, our contributors are not providing expert advice (unless noted) and readers should always seek professional advice on financial topics.

There are many variables involved, so you need to figure out several possible scenarios and weigh whether an HSA is likely to be beneficial.

We’ve had an HSA for the last two years, but we’re going back to a PPO for 2013. When we started the HSA in 2011, the HSA was so much better than the PPO, it was the obvious choice. Even if we had reached the max out-of-pocket costs, we still would have been slightly ahead. But the plans are changing for 2013, making the PPO a better choice for us. We’re a family of four, with some chronic ailments that require regular doctor visits.

My basic computation:

(money saved in taxes)+(money saved in premiums)+(employer contribution to HSA)-
(difference between HSA deductible and PPO deductible)=amount saved by the HSA if deductible maxed out

If this is positive, go for it. If’s it’s negative, you’ll have to weigh the odds of needing medical care and decide if you want to take the chance.

Also be aware that there’s more record-keeping involved with an HSA. You’ll have to deal with more medical bills rather than just paying a copay upfront, and you’ll have to keep meticulous records that you can present to the IRS if you’re audited.

Record Keeping:
I would say, since HSA company provide credit card/ Debit card and if all medical related expenses are paid through these card, It would be easy to track all your expesnes as well as would be easy even if there is a audit or query from IRS.

I’m disappointed the author made the mistake of saying that tax brackets cause all your income to be taxed at the higher rate. Brackets only apply to income over the cutoff, and keeping your income below the bracket only means you didn’t pay a higher rate on the income over it. If the author actually tried thus she should have realized it didn’t in fact work.

I was surprised to learn recently that my sixty-year-old mother, an educated, middle-class person, didn’t know how marginal rates worked. But then, she’s an English teacher, not a finance writer. If Kristin wasn’t clear on this, or if she just phrased it badly, an editor should have caught it.

“I’m disappointed the author made the mistake of saying that tax brackets cause all your income to be taxed at the higher rate.”

She did not say that explicitly. I suppose it could be implied. At most you could save 25% (or whatever bracket you fall in) of 3250 (or 6450). Which is a substantial amount of money.

“The big tax savings come in when contributing to the HSA puts you in a lower tax bracket. If you’re on the lower cusp of your current tax bracket, contributing a few hundred bucks to your HSA could mean a big tax savings.”

But if its just a few hundred bucks…your only saving 25% on a few hundred bucks.

And yes trying to get into a lower tax bracket, for most purposes, is a moot point.

Thanks for pointing this out, and apologies for the error. I’ve brought it to the editor’s attention (along with the bit about at what age you can make catch-up contributions), and Ellen is going to update the story.

Thanks for speaking up about it. I have a lot of respect for the GRS community, so I can’t help but feel I’ve done you guys a disservice.

I know frugality, but when it comes to topics like this, I’m still learning. I wrote about that in an article a while back–so I thought I’d share my learning process with the readers. Next time I’ll make sure to run the particulars by a few more people.

I don’t blame you for the errors in the article. You put yourself out there and shared what you had learned, correct or otherwise. I blame the site editors that let this article through with errors that they, as the experts, should have caught.

Actually, the author’s tax savings are computed correctly. If anything, the savings are a little understated for filers in the many states which have a separate income tax, which typically adds another 3-10% savings.

Any deduction from your income is taken from the “top” …. so the funds socked away into an HSA are taken from the top tax bracket of your earned income. This isn’t to be confused with your “effective tax rate,” which is typically around 10-15% for more middle class earners.

So enjoy those deductions, you’re preventing that amount from being taxed at a 25% rate if you’re earning about $40,000 or more per person. (leaving some room for the deduction itself)

I am a business owner (LLC) who insures for health with CareFirst BC/BS. I have a family plan with a $5k deductible.

1. Families tend to be more predictable in health spending than individuals. It just makes sense that if you have four people your spending will have less variance than with one person.

2. The lower premiums save me about $500 per month (pre-tax). Yes, this is very close to deductible spending I will need to do out of pocket, but three years of every four I have ended up ahead.

3. Last year my wife needed surgery so we spent the full deductible, and the loss ends up being negligible compared to a regular PPO plan.

4. The savings plan means that all of our medical expenses are paid with pre-tax dollars. In my state, this means a roughly 35% savings compared to after-tax dollars.

5. CareFirst has the biggest network of providers in my area. This means I always pay the negotiated CareFirst rate at providers. This is a HUGE difference over the rate that scum-sucking oligopolists like LabCorp try to exact for basic tests and other diagnostics.

The bottom line is that if you are paying out of pocket for all your coverage, an HSA plan is awfully hard to beat.

My son recently needed to see an ortho Dr and get an xray. When we got the bill (because it will go towards our deductible) and seeing the “negotiated rate” just is such an eye opener. Not only do I have an insurance and HSA plan available to cover the cost, but the idea that someone paying out of pocket with no health plan would have to pay practically double? It’s really sad.

That last sentence really strikes a chord with me. I had to have a medical procedure on my leg that required several visits. My portion of the $780 procedure (after insurance) was $250. Not too bad, I thought, until I changed insurance companies and the new policy would not cover the final treatment. Since I was uninsured, the bill was $117. I’m not naive, but when is it ever to fair to treat two sides of the situation so unevenly? The prices seem so arbitrary.

When we finally got health insurance after 10 years, I didn’t realize how the rules had changed. My favorite doctor is “out of plan” and I thought I would just have a higher copay. Instead, the insurance spent 6 months assuring me I just had to get past the waiting period, then refused every charge I had for the entire year–everything was considered a pre-existing condition (even a bad mammogram and the followup biopsy). That’s when I learned that my doctor would give me a 40% discount, but only if I had no insurance. I had $10,000 in medical bills that year, that would have cost me only $6,000 without the bad insurance. My HSA was a lifeline! Now I only use an HSA, and pay cash for all medical expenses so I can get the biggest discount.

For anyone who finds themselves in the Dr. a lot or buying over the counter medicines these plans are great.
My wife and I don’t have children yet and her work pays the first couple thousand of our deductible, so for us it isn’t worth it. But once we have kids, who knows.

The employer contribution is a huge variable in the HSA argument. I am incredibly fortunate. My employer contributes the annual deductible amount to my HSA ($1250 for individual and $2500 for families; 2013 plan). I am required to contribute a minimum of $300 per year, though I elect to contribute $2,000 to maximize the tax benefit.

If you are not receiving a contribution from your employer, you should begin a discussion with your HR staff. They are obviously saving money on you since you selected the HDHP plan over a lower deductible plan.

The employer’s contribution to my HSA along with the lower monthly premium for the HDHP plan make this a no-brainer in my situation.

Two corrections – first, HSA’s USED TO be able to be used for bandaids, over the counter medicines, and the like, but that is no longer the case. You can still use them to buy over the counter drugs, but only if you have a doctor’s prescription for them. Second, the amount you can contribute increases when you are 56, not 65. Once you are over 55, you can contribute an additional $1,000 per year, above and beyond the $3,250 individual amount or $6,450 family amount (2013 limits.) But, this is guided by the age of the person who is carrying the coverage. I have family coverage through my employer. My husband is over 55, but I am not, so we are not allowed to take advantage of the catch-up contribution.

No mention of the difference in the cost of Premiums when comparing (any) plans? That’s clearly a consideration when making the decision on plans, isn’t it?

In my situation (work for very large company), when they came out with a High Deductible Plan + HSA offering, the difference in the monthly premium made the HDHP choice very easy. What I was saving in monthly premiums could go into my HSA to fund my deductible requirements(my employer also makes a 1 time contribution each year). My monthly expense was not any greater and my HSA money belongs to me.

I guess this article was supposed to focus on the HSA side of things, but it’s impossible to ignore how it affects your health plan and premiums if we’re talking about evaluating total expenses.

You may want to check out the earlier article on HDHP with HSA if you missed it (it came out on a Saturday). It looks at the package and also makes some comparisons to other savings vehicles. (And it doesn’t just focus on risk of not affording the deductible, although that is obviously important.) The comments were also super interesting and brought up some issues I hadn’t considered.

The “cons” list is big enough to make me think that there’s no way I’m opening an HSA. Especially since myself and my family and quite healthy. No obesity or any other problems that seem to plague this country. I know unexpected things happen, but there’s a limit to how much you can protect yourself reasonably. Those cons are pretty bad and outweight the pros. At least for my and my’s family situation.

The article is going through a quick overview and not helpful in the sense how helping people decide if it is right for them.

I currently have an HSA through my company a few years ago since the premiums were half the cost to the PPO. If you are healthy, then it is better since once you have enough money in your account to cover the deducible then you are good. You can put as little or as much money as you want. I wish I had a HSA earlier for all those years that I was healthy and not using my insurance other than preventative care (100% covered for me.)

The important thing whether it is a PPO, HSA, HMO, etc is that you need to do the math for your situation to determine if it any health plan works for you.

Note that a HSA is not a FSA. HSA you don’t lose your money at the end of the year and that money is yours. Even if you switch from a HSA to say a PPO, you can’t put anymore money in the account but you can still spend it on medical expenses.

You say you and you’re family are quite heathly…..that’s really what/who the HDHP and HSA accounts are for.

You save money on the premiums and you can put tax exempt money into a savings account to use for medical expenses (they can be used towards your deductible). The savings build up year over, they are not use it or lose it like an FSA.

You still need to look at your costs versus waht is covered in the two different plans, but you may find you save quite a bit of money switching to an HSA.

It really is about the options you have available. At the company I work for, the changes they made for 2013 make the HDHP a no-brainer for almost everyone. The maximum out of pocket is the same for both plans, but for HDHP you’re paying drastically lower premiums.

Also, your healthy years are the best time to start an HSA. The money accumulates and before you know it, you’ll have the deductible or even your maximum out of pocket amount saved up and ready to go – worry free insurance!

I agree with Eileen on this one. A big part of what makes an HSA worth it for me is the difference in premium and the employer contribution.

When I switched to an HSA, I simply took the difference in premiums from my old HMO and the new HSA and used that money as my own contribution– so the overall cost to me remained flat. The difference is that after a fairly normal health year, I now how $1800 stocked up in my HSA. That’s $1800 I wouldn’t have seen had I stuck with the HMO.

My hope is that the next two years will be similar– then my HSA account will equal my deductible and my out-of-pocket risk goes to zero.

Well, your out of pocket risk goes to zero for one year, right? But what if, the year your HSA account has grown enough to cover your deductible, you take a nasty spill at a New Year’s Eve Party and require care spanning December 31 and January 1? Then you could potentially eat up your entire HSA on the deductible for one year and owe a whole new deductible the next year, even though it’s really just two days.

That’s correct, but the point I think Chris is making is that it’s not really any different than paying for HMO/PPO plan where you are paying a higher premium whether or not you use the coverage.

If you are paying $XXX per month toward healthcare, a HDHP+HSA allows for the opportunity to save part of that $XXX in an account you own. In a HMO/PPO plan, that money is going towards a Premium no matter what and can’t be “saved”, even if you don’t have $1 of health care expenses over the year.

Also, Chris doesn’t say that he would stop contributing to the account once he’s reached the amount needed to cover the deductible.

Sure, I understand and agree. But I think with the deductible kicking back in each year, the meaning of “savings” can be a little different. Like you’ve cautioned before, it’s got to be a process where you delve into the math of employer contributions, co-pays, co-insurance, deductibles, likelihood of injury or chronic conditions, etc.

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Eileensays:

06 December 2012 at 7:06 am

Absolutely true. You have to consider what is available to you, what the premiums are, what the coverage is.

Personally, we don’t (thankfully) have any chronic issues. But I don’t consider “likelihood” of an issue beyond that because I simply can’t control the universe.

Being able to shift our funds from premium payments to HSA savings and not be out of pocket any more than before, made the decision easy. The chance that we’ll be rolling over a balance each year (and we have, even after reaching our deductible this year) is much more attractive for us.

I guess the way I look at it, is that if I had stayed on the PPO plan, I would be “hitting the deductible” each year (financially speaking), no matter what kind of health we had and would have 0% chance of carrying any funds over.

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Chris Msays:

06 December 2012 at 6:58 am

Yes, Figs, that is true. I guess I need to save up to twice the deductible then.

Still, I’d rather take the risk of a nasty spill on New Years Eve than take the risk of giving up almost $2000 a year in premium costs I don’t need.

If someone is in a financial situation where the deductible can cause them to declare bankruptcy or lose the house, then the risk of an HSA is probably too high. I’m not in that situation, so I’m willing to take the risk.

Sure, and I’ve no doubt that you’ve done the math and this plan works out for you. With my own personal financial situation, I’d be more comfortable staying on a low cost traditional plan for a couple of years that’s mostly paid for by my workplace, saving up some money, and then kicking over to an HDHP plan if it makes sense for me then (though by that time there may be kids, which is a whole ‘nother consideration, I suppose).

That is, I’m throwing another layer onto this: I’m young, relatively healthy (and expect to stay so), but I have debts to pay off, and I’d rather hedge the chances of an illness or accident by staying on a traditional plan and using the savings to pay down those debts, instead of using the premium savings for an HDHP with HSA to fund the HSA.

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Eileensays:

06 December 2012 at 7:10 am

See – I think that’s the difference in what’s available to you. From my employer, the “low cost” plan is actually the HDHP+HSA option. If I chose a “traditional plan” (which if you are as old as me, is really kind of an odd use of “traditional” — my original health plan coverage was a plan that had a deductible and 80/20 coverage after that with no FSA or HSA to help!) I would be paying around $300 more per month. Instead, I send that to my HSA.

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Eileensays:

06 December 2012 at 6:40 am

Exactly!

We’ve actually had some expenses (wisdom teeth extractions, back issues, but thankfully nothing serious) that used up a lot of our deductible (and thus the HSA fund) the last 2 years, but I’m still sold on this set up…for us anyway.

The ACA allows high-deductible plans, but limits how high the deductibles can be, and how much you can put into the HSA per year. So very-high-deductible plans will go away, but HDHP/HSA more or less as described in the post will still be around.

Without a doubt the HDHP and HSA are worth it for a family. We are fairly normal, I have 20 month old twins who go for regular checkups and maybe a visit once every 2 months because of ears or cold or something, my husband and I are healthy, I am pregnant again and take some regular medications. We have a 30 dollar a month premium a 5000 deductible, 8000 max. Just got a statement last week and we have spent 4300 in medical this year out of pocket tax free out of our HSA. With premiums our total for health insurance for our family is 4660 for the year. A traditional plan would have been 636 a month premium for a family plus copays and such or 7632 a year plus.

My husband has the 6400 max taken out of his check or about 280 a pay, 15 goes to a premium and 265 goes into our HSA.

Next year when we have the baby we will max out our 8000 in March, we have enough in our HSA to pay this and the rest of the year will be “free” everything! Off to the doctor we will go that year for dermatologist skin checks, new insoles for our shoes, and so forth, stock up on monthly prescriptions, thus saving a few dollars the next year.

Also most hospitals and health care providers will give you a 10-20% discount on your bill if you pay in full, just ask, I pay all my bills on my 2% cash back credit card then write myself a check out of the HSA. Thus taking the 8000 max down to 7200 a year possibly.

I had not thought of the credit card approach. I have a HSA debit/visa thing and use that and I’m done. But looking back on this year with $4000 of HSA covered expenses, that would have been a good use of CC rebates!

I have had an HSA for 3 years too – it has a $1200 deductible, which my employer contributes the full amount to my HSA (distributed quarterly). I have hit my deductible every year, but maybe that’s because it’s relatively low for a HDHP. I have added additional funds to my HSA account too, starting in the same amount I would have paid for a PPO and slowly increasing it over the years. I am about to hit my deductible for this year already (started Aug 1) and still have $1400-ish in my HSA. So it has definitely been beneficial for me. My husband has a PPO through his insurer and I can also use “my” HSA money to pay for HIS copays.

Back in the day, when HSAs were less known, the conversation in regard to their tax implications, deficit creation, and fear of it causing increases in the uninsured (by employers opting to stop providing coverage) was remarkably similar to the argument we hear on Obamacare—just not in scale or scope. I dug up this article http://www.cbpp.org/cms/index.cfm?fa=view&id=1872 from way back– when it was still speculative. But, it’s still relevant to those on the fence weighing their options or just want good historical perspective. It’s all in the math of what works for you, but there is no doubt that these plans were created to benefit the wealthy and employers–while allowing Joe Average to dip a toe in the deep end (not so much anymore). If the math works, I think these things are a top-shelf bargain and the best available option for *healthy* savers who want to build *efficient* wealth and maintain an actual ER (as in–emergency room) fund. It’s really effective to start one in your early (hopefully healthier) years—when, so many other things take precedent, I know– so that the money builds to the point where reasonable annual deductibles don’t factor into your policy buying equation and you can actually choose for the actual benefits therein.

In NJ, I believe that only certain high deductible plans qualify one for an HSA. When I reviewed those plans, they were rediculously expensive for the high deductibles they had. And then there were limited choices as to which institutions could hold the money, and their interest rates were even worse than average. It looked like a bum deal here.

“If you are married and your spouse is a named beneficiary, s/he becomes the owner of the account and assumes it as his/her own HSA. If you are unmarried, your account will cease to be an HSA. It will pass to beneficiaries or become a part of your estate, and be subject to applicable taxes.”

We are in our late 50′s and just changed to HDHP with an HSA. You can contribute to the HSA with your own money if you have not had the full amount deducted from your pay. So we will send a check to max out the account for the year; it will grow taxfree ,and ours can be invested in a variety of ways. If you have the money and are a few years from medicare this can be part of planning if you plan to retire before 65. As we will.

I didn’t. Not yet, at least. My current plan is so good, and the premium isn’t much more than the HSA premium ($5 difference). I did the math, and with the amount I’d have to pay for prescriptions, I would actually just break even with the amount I’m willing to save in the HSA. When I’m in a position to save more, I’ll definitely open one.

Most preventive healthcare is covered with HDHP. This is from the new ObamaCare laws. Routine physical, annual pap, birth control is all covered and not part of the deductible.

These exams are generally the only time I go to the doctor. HSA Plan makes perfect sense to me. I actually ended up going for a sickness, but paid the bill out of my regular budget. I am keeping my health savings account for a big medical emergency.

I’ve had an HSA since 2010. My employer offers two varieties – one with a $1250 deductible and $2500 out of pocket max, 10% coinsurance after the deductible until you reach the max – and one with a $2500 deductible, $3000 out of pocket max and 20% coinsurance. My employer also contributes money to our HSA accounts ($750 for $1250 plan and $1000 for the $2500) effectively lowering our deductibles. The great part is that since preventative care is 100%, if you never go to the doc or get sick or need care – you only have to pay the premiums AND you’ll have $750 (or $1000) in the bank at the end of the year. Even if you do have to go to the doc once or twice, use the HSA money..and it’s nothing out of your pocket.

I’m on the $1250 plan and contribute the max (since my employer puts in $750, I contribute other $2500) and it’s a pretty good deal. I take some expensive medications, so I make sure to order them all at once in Jan or Feb so I can hit my deductible by April..and then it’s 10% the rest of the way. T

I’ve also done the credit card piece – works like a charm. Pretty nice to have tax free money AND get credit card rewards to boot!

We love HSA’s! I had one through my former employer and the best thing is that it’s not a use it or lose it like FSA’s are. Now that I am self-employed we’re in the process of getting ready to start one ourselves. The tax savings are nice and it can be used year to year.

Maybe I’m the only excel geek here, but I took both the traditional plan and HDHP plan offered at work, input all the info (premiums, deductibles, co-insurance, max out of pocket) into excel with formulas so each element kicked in at the right point. When I was all done I had a nice graph that told me if I spend less then $1300 (single plan, more like $3400 for family) on medical expenses for the year, the HDHP was better. More than that, the Traditional would be cheaper. I realize now I forgot to include the HSA tax savings in that formula so the break even point will go up a bit. But still cost wise, in a typical year my spending that counts towards the deductible is zero, so a grand in my pocket instead of the insurers. This year I’ve had a few visits but my out of pocket is still under $500 (still waiting on 1 more bill to come in), so I still come out ahead.

For me, due to the traditional plans co-insurance, if I spend enough to hit the max out of pocket for the HDHP, the traditional hasn’t maxed out yet. So in that worst case where I spend exactly the HDHP deductible, I would only be $900 more out of pocket than if I had the traditional. In the catastrophic event where I’d max either one, the traditional is only $500 cheaper. For a maximum downside of $900, plus tax savings on top of that, given my typical low expenses HDHP is awesome for me.

On a side note, on a friends plan, under HDHP prescriptions count towards the deductible and 100% covered once it is met. For their traditional, even once you hit the max out of pocket you still need to shell out a copay for presciptions (but not Dr visits). Due to a chronic condition, their prescriptions are enough to tilt the max out of pocket, so all other health care is free with HDHP. With the traditional plan, they would still be shelling out for prescriptions later in the year. I know its not a normal situation but just to reiterate you really need to do the math for your specific situation to see which is better based on your typical health expenses.

My company changed our insurance options and their contributions for next year, so I decided to go ahead and try to hdhp option. If we do certain activities (get a health screening, do an online health survey, that sort of thing) they will put money in the account. The kids and I are pretty healthy, but my husband, who is on my plan, has some health issues. I’m hoping that with the lower premium and the employer contributions that we will come out ahead. We will see! I definitely like the idea of being able to put money aside tax-free, without the risk of losing it like in a FSA. Not knowing exactly how all the Obamacare stuff is going to shake out in the next few years scares me a little bit, but I think this is the best choice for us right now.

Something to note for military families: TRICARE and HSA are incompatible. I learned about this a few months ago when I took a new job (civilian) which offered a HSA/HDHP plan, while my family was already covered by TRICARE through my husband.

An individual who is covered by an HDHP and who also receives health benefits under TRICARE (the health care program for active duty and retired members of the uniformed services, their families, and their survivors) is not eligible to contribute to an HSA. This is because coverage options under TRICARE do not meet the minimum annual deductible requirements for an HDHP.

A few additions/clarifications. You can select the HSA deductible and Blue Cross has them available from $1200 on up. There’s no point in selecting a deductible higher than the amount you can put into the HSA, unless it saves you more than that amount in premiums.

Second, once you do meet the deductible, remaining care is usually covered 100%, whereas PPOs often have an 80/20 split for several thousand more dollars of bills AFTER you meet the deductible.

Third, if you really are going to park the money, don’t choose an HSA account that just puts the money into a savings account where you’ll earn nothing. There are accounts where you can invest in mutual funds or even trade stocks with the money.

Fourth, there’s no requirement to withdraw from the HSA account in the same year as you incur the bill. You can put it off (saving the bills) until retirement or you have a need for emergency cash and submit the bills at that point. In fact, you’re better off paying minor bills out of pocket if you can, leaving the dough in the HSA.

I am very fortunate to have excellent insurance coverage through my employer. We can also opt for an HSA, which I did last year, and despite the savings, I chose not to do so this year because the paperwork was a nightmare. The savings did not make up for having to track our medical expenses twice. We had to wait for the EOB (30+ days from date of visit), copy it and send it to the HSA provider, and then follow up with the HSA provider 30 days after that. The amounts paid/not paid were sometimes baffling and there were many things that had to be resubmitted before being paid. Had I known how much time it took to get both insurance companies to do their jobs, I wouldn’t have done the HSA.

Whoa, I stopped reading after you incorrectly stated that you can buy over the counter items like band-aids and condoms. Nope, not anymore. PPACA eliminated that in 2011. If you use your HSA to purchase over the counter items you will pay a 20% tax penalty. In addition, be careful with accupuncture and massage therapy. Unless it’s prescribed by your physician it might not be covered.

Allthough a HSA is an excellent product according to me, the fact that the contributions and tax savings are regulated by government and can change at any time, makes me put q little extra away every month in a seperate savings account.

HSA funds CAN be used to pay for the deductible. This is truly one of the advantages of an HSA, if you have the funds to set aside.

Most HSA plans are going to cost less (and in some cases significantly less) than a traditional PPO or HMO/EPO plan. For example, my family has an HDHP with an HSA that we pay no money out of pocket for in premiums (the subsidy my employer pays covers the full amount of the cost, even for family coverage). For me to get family PPO coverage, I would have had to pay close to $400 per month in insurance premiums. I do benefit analysis for a living, so I have access to view the costs of many plans across the country. $400 is not a substantial amount of money compared to the cost of several plans I’ve seen. There’s higher coverage that’s even more expensive too.

My employer elected not to put funds in the HSA this year. We’re rolling over funds from 2012, and the difference that I would have paid in premiums, I’m actually putting in my HSA. So those dollars are going to my account instead of just going away for coverage. And if we don’t use all of those funds, then they’ll just roll over into next year.

Basically, I’m banking on the fact that we won’t have significant medical expenses for the year. I’ve had an HDHP several times and we haven’t approached that deductible. We have the coverage so if something catastrophic happens, we’re covered, but by and large, I see it simply as a way to keep more of my money for myself.

One thing that I don’t think was mentioned is the fact that HSA companies negotiate better deals for expenses than traditional plans. There’s often a discount provided for the services so you aren’t even paying the full cost (pre-deductible) of the R&C (Reasonable and Customary charge). So even though you’re paying 100% of the cost of your doctor visit because you haven’t met your deductible, the 100% of cost for an HDHP may just be less than the 100% of cost for a traditional PPO, pre-deductible.

So I see the advantages of an HSA being these:

Lower (in some cases much lower) premiums

The ability to decrease your taxable income, while keeping the difference in an HSA, to be used for medical expenses you were likely to incur anyway

Discounts from the doctor

You keep the funds in your HSA, so even if you leave your job, you still have the funds.

Don’t forget that HSA contributions, when done as a payroll deduction, are exempt from both FICA and Medicare payroll taxes. This is kind of a big deal. Whenever I see discussions on HSAs, I wonder why this isn’t near the top of the pros list, let alone forgotten about.

It does depend on your individual HDHP plan that accompanies it, but HSAs are an even more flexible, less taxed retirement vehicle than either a 401k or a Roth IRA.. just put away the max via payroll deduction, keep your receipts for immediate future reimbursement if needed, and let it grow, invested, tax-free.. Its not like you won’t have medical bills in retirement, if you retire early, and if you retire later, its eligible to be used anyway.

Its the most tax advantaged vehicle avaiable for retirement.. it should be considered by everyone..

I agree with some of the other commentors:
1). There is an ENORMOUS savings in premiums when you use HSA plans (which is most notable when looking at plans for more than 1 person).
2) You cannot purchase OTC items with these plans anymore.

More reasons why I’m visiting this blog less & less. It’s becoming a crappy version of Wise Bread.

I had a business with myself and one employee to be insured. When I turned Medicare age we no longer qualified as an insurance group so I set up my employee (and her husband) with an HSA. I like the concept but there were 2 problems. Even high deductable insurance purchased on the individual market is very costly and sometimes unobtainable if there is a medical history (which her husband had). She consistantly failed to make her contributions to the HSA as there were always other personal expenses which in her mind were higher priority. So when medical expenses did come up they tended to be large since there was limited funding. However one advantage was that bills, even though above the deductable, passed through the insurance plan and were priced at the insurance company discounted rate.

The author also needs to check the facts regarding what medicines are covered. from the irs website: “Qualified medical expenses. For HSA, MSA, FSA, and HRA purposes, a medicine or drug will be a qualified medical expense only if the medicine or drug:

Requires a prescription,

Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or

Is insulin.”
This eliminates over the counter meds (without prescription) .

I had a HDHP 2 years ago, and had a HMO last year and will continue to do so this year.
So if I need the money out if my HSA… how high would the tax and penalties be? I am not contributing to the account any more and not sure I want to keep it. It seems like it is a waste and another bank account to track now.

My family is choosing a HSA/HDHP for 2013. I have my own business and an individual family BCBS plan was $525/mth. Our HDHP is $260 for 4 people. I’m saving $3,180/year in premiums immediately. Our problem with our “Total Blue” plan through BCBS is there were SO many items that simply were not covered by our plan and with the high monthly premium we were continuously met with, “you need this but it’s not covered and will be an additional $150.” This scenario was especially true with prescriptions that were not generic. I now have a $6,500 family deductible but our PPO plan was $5,000 and we never met the deductible anyway. Now I will enjoy the tax savings, lower monthly fixed cost, and be able to purchase required items with money I set aside. It seems like a win-win for us.

We once signed up for a high deductible plan, but there was NO option for an HSA – that was on our own, When I tried to sign up, no one would talk with me; few banks were interested. We just signed up again, and $3000 is going into account, all done through employer sponsored bank. As of now, $0 has funded and if we are lucky, it “might” be funded next week with a whole $116 to start us off. Thank goodness no one is sick. We DO have to pick up $75 in Orthotics , but can’t do that or pay for it obviously till we get the funding on our card. I am used to Flexible spending accounts where the money is available beginning of the year, that is NOT the case with an HSA. So let’s say you incur a large bill from a hospital stay early in the year…You ‘ll have to start making arrangements with everyone to accept $100 every 2 weeks or whatever….since there is no money to use till it’s funded. So that $3000 will take the entire year to put in…and spend

I think you should check the statement regarding how HSAs can be used after age 65. It’s my understanding that the distributions still need to be for qualified medical expenses. AT 65, once you’ve enrolled in Medicare, you can no longer make contributions. You can, however, use your HSA balance to pay for your Medicare premiums.

There is one very LARGE pro that you missed – if you have your HSA contributions done through payroll with your employer under a section 125 plan, the contributions are pre FICA and Medicare tax (7.65% of your gross income)- if you leave the money in your account till you are 65, it turns into a 401k and you can withdraw for any non medical reason. Traditional 401k contributions are NOT exempt from FICA and Medicare tax – they are only exempt from Federal and state income tax therefore the money left in your HSA until retirement will never have the 7.65% taxed on it! I tell my clients to max their HSA first then their 401k as they are saving the 7.65%. In addition, most banks that will administer an HSA (mine is Mellon Bank) charges no fees after you accumulate $1500 and will offer 401k-like investment options for the balance in your account so your return can be as high as your 401k if not higher.

I am retired, and in Dec 2012 I had 18 months of health care to cover after I finished with COBRA and before Medicare. I am in good health and opted for a high deductible plan ($6000) to reduce my premiums ($390/mo).

I thought an HSA would be a good choice, so I applied for and got a Blue Shield 6000 that allowed one. My goal was going to be to max out the account for the year and a half and use it if I needed it, but have it available after I turned 65 to pay for any medical expenses that came up (my understanding was that it still had to be used for medical expenses and not just anything). It just seemed like a good “investment”.

I just found out that my bank (Wells Fargo) will charge a $4.25/mo maintenance fee if my account is less than $5000. I can’t fund it that high because of contribution limitations, so I’ll always be paying the fee. I know it’s only $50/yr, but it’s the principle. Since I don’t have “income” (we are withdrawing from our IRA and living off of investments), I’m not even sure about the tax advantages of the contribution.

So, at this point, I don’t think I’ll be using the HSA feature of my health plan. Am I missing something?

Found this helpful post when I was trying to figure out how to decide whether an HSA was right for me. I eventually settled on this calculation & figured I’d post, in case it would be helpful to anyone:

If you aren’t maxing out any 401K matching available from your employer, do that before considering the HSA.

And choose the HDHP/HSA if A>B. (Consider compound interest tax savings as gravy.)

This is a conservative calculation and there are other situations in which you might still choose the HDHP/HSA. E.g. if you never use medical care besides preventive care, you might ignore the deductible because it doesn’t apply to you.

I contributed to an HSA starting in 2004. I have records, receipts, EOBs etc for over $35,000 of Out of pocket health expenses but never tapped the HSA. I am over 65 now and want to close the HSA and use the money on a new home purchase. I have detailed proof that I spent the money on qualifying expenses. I had the after tax money so kept the HSA money. What must I do to avoid paying tax on the money now?

A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA.

Example. An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004. The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary’s gross income.

One thing that was missed is that the savings for having an HSA account are not only tax savings. The premiums on the high-deductible insurance are lower. You have to consider those savings, which add up, in your cost-benefit analysis.

We have a PPO with hsa account and we absolutely love it. My husband pays 10 dollars a paycheck with a non smoker discount of 10 dollars a month. So total for premiums we pay 30-40. We contribute 32 dollars a paycheck into our hsa account. My husbands company matches dollar for dollar up to 500. So that’s 500 extra each year and we also do yearly health screenings which allows us to earn up to 800 dollars when we meet all the health requirements. That money is deposited into our hsa at the beginning of the year. We pay 158-190 a month for healthcare between premiums and hsa deductions for a family of 4. We have a 3,000 dollar family deductable and between deductions, company match, and health screenings we would cover our deductable. Also if we don’t use the money towards our deductable it rolls over to the next year. For us it is 100% worth it since out of pocket we are only depositing 1,700 into the account and end up with 3,000 a year.

We have a PPO with hsa account and we absolutely love it. My husband pays 10 dollars a paycheck with a non smoker discount of 10 dollars a month. So total for premiums we pay 30-40. We contribute 32 dollars a paycheck into our hsa account. My husbands company matches dollar for dollar up to 500. So that’s 500 extra each year and we also do yearly health screenings which allows us to earn up to 800 dollars when we meet all the health requirements. That money is deposited into our hsa at the beginning of the year. We pay 158-190 a month for healthcare between premiums and hsa deductions for a family of 4. We have a 3,000 dollar family deductable and between deductions, company match, and health screenings we would cover our deductable. Also if we don’t use the money towards our deductable it rolls over to the next year. For us it is 100% worth it since out of pocket we are only depositing 1,700 into the account and end up with 3,000 a year.

We have been using an HSA for the last few years. I must be missing something obvious because I just can’t figure out why anyone who usually doesn’t meet the HSA deductible would want to use anything else. In our case by choosing an HSA for our family of 8 (including 6 children) the reduced premiums save us more than the amount of the deductible, plus we have an HSA that doesn’t expire (unlike an FSA) and can be used for previous year’s expenses (in a year where you do go over the deductible).

WebMD’s tool tried to convince me that that an EPO that would cost $15k per year is more cost effective than an HSA which with premiums plus deductibles costs around $7.5k per year (which doesn’t take into account the tax savings of contributing to the HSA). Surely the HSA is by far the best bet?

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